Feds might guarantee 3 million mortgages

WASHINGTON 
WASHINGTON – Negotiators for the Treasury and Federal Deposit Insurance Corp. are discussing a plan to have the government guarantee the mortgages of millions of distressed homeowners in what would be a significant departure for the federal rescue program, which has so far directed relief exclusively to banks and other financial institutions.

The plan, which sources said could cover as many as 3 million homeowners in danger of foreclosure and cost between $40 billion and $50 billion, would go well beyond previous government and private-sector initiatives. Critics say these have attracted too few lenders or offered too little aid to homeowners to stem the foreclosure crisis.

But with economic anxieties continuing to mount and political pressure growing for expanded help to homeowners, federal officials could announce a new program to cover as much as $600 billion in mortgage loans in the coming days, sources said. They spoke on condition of anonymity because the negotiations were ongoing.

Treasury officials confirmed yesterday that discussions were under way for homeowner aid but said any figures remained fluid and other options were under consideration.

Several sources said the mortgage program faces resistance from the White House.

Tony Fratto, White House spokesman, said last night: “We have been reviewing a number of housing proposals for some time, and no decisions have been made on any of them. Any inference that we're 'nearing' a decision on any one of them is simply wrong.”

While the financial crisis is rooted in the ailing mortgage market and the wave of foreclosures sweeping the nation, none of the $700 billion rescue package approved by Congress has yet been directly targeted at struggling homeowners.

On the presidential campaign trail, Sen. John McCain, R-Ariz., has proposed a program to help distressed homeowners by having the government issue new, federally guaranteed mortgages on more-affordable terms. Under his plan, the government would absorb the troubled loans at face value and take the full loss rather than having lenders be responsible for any of it.

FDIC Chairman Sheila Bair has been especially outspoken about helping borrowers. But yesterday, her agency said little publicly about the specifics of the plan being negotiated.

“While we have had productive conversations with Treasury about the use of credit enhancements and loan guarantees, it would be premature to speculate about any final framework or parameters of a potential program,” said Andrew Gray, an FDIC spokesman.

The issue has stirred political rancor. Critics of foreclosure aid question why a homeowner who took on an unaffordable loan is entitled to government help while those who have kept up with payments receive nothing.

But some members of Congress seized upon the fact that the first $350 billion of the rescue package has been allocated not for homeowners but for financial institutions.

“The key to our economic recovery is in addressing the root cause of this crisis – the housing crisis,” said Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking Committee. “Federal agencies and financial institutions must do more to modify the mortgages they hold in order to stop foreclosures and help families keep their homes.”

Under the program being discussed, banks or other lenders would agree to reduce the monthly payments of borrowers to a level they could afford. The payments could be reduced by lowering the interest rate, cutting the amount owed or extending the repayment period. The goal would be to help homeowners avert foreclosure.

In exchange, lenders would get a government guarantee that they would be compensated for a portion of any losses should borrowers default on the reconfigured loans.

One of the toughest issues facing negotiators is how to define which struggling homeowners should get a bailout. If the government guarantees relatively risky loans, it is more likely to face a steeper tab. So if the gap between a household's income and what it owes on a mortgage is large, for example, the government may shy away from guaranteeing the loan.

Aware that how they define homeowner eligibility could cause a political furor, negotiators have struggled to come up with parameters that would be considered fair, a banking industry source said.

A model for the program is the one created by the FDIC after it took over IndyMac, a Pasadena-based bank that failed after having made billions of dollars in risky mortgage loans.

IndyMac works with any borrowers who are delinquent or in default on their loans or at risk of becoming delinquent. The goal is to change mortgage terms so borrowers must pay no more than 38 percent of their income to cover their mortgage costs, including principal, interest, taxes and insurance.

Under the IndyMac program, a homeowner is excluded if the costs of reducing the loan payments exceed the costs of simply foreclosing on the home.